Edited version of private advice

Authorisation Number: 1052163481254

Date of advice: 5 September 2023

Ruling

Subject: GST - supply

Question

Is Entity A making a GST-free supply under an item in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it supplies its services to Entity B, for which it receives a payment of commission?

Answer

Yes. Entity A's supply of its services to Entity B will be GST-free under either Item 2 or Item 3 in the table in subsection 38-190(1) of the GST Act.

This ruling applies for the specified period.

The scheme commenced on the specified date.

Relevant facts and circumstances

1.    Entity A is an Australian entity, carries on an enterprise in Australia and has an ABN.

2.    Entity A is currently registered for the goods and services tax (GST).

3.    Entity A is based in Australia and carries on activities as a sales agent for Entity B.

4.    Entity B is a foreign entity and is located overseas. Entity B's registered office is in a country overseas.

5.    Entity B carries on its entire core business outside Australia.

6.    Entity B is not Australian resident for Australian income tax purposes; does not have any employees/representatives or presence in Australia; and is not registered or required to be registered for GST.

7.    Entity B is the manufacturer and supplier of the specified goods (the Products).

8.    Entity B has engaged Entity A as a sales Agent to provide services of finding prospective buyers for the sale of Entity B's products.

9.    Entity A will be entitled to receive a commission from Entity B for the supply of its agency services, subject to specified conditions being met.

10.  The agreement between parties does not require Entity A to provide its services to another entity in Australia.

11.  Once Entity A has found a prospective buyer (customer) and gets the sales confirmation, it will pass it on to Entity B to handle the rest. It will hand over details of the buyer to Entity B's sales team which is located outside Australia. Entity B executes the contracts with the buyers.

12.  Entity B's sales team overseas handles quoting, manages shipping directly from the overseas country to the relevant destination, invoices and collects payments directly from the respective buyers.

13.  There are no sales transactions between Entity A and Entity B. Entity A does not, at any time, own or take ownership of the products being sold by Entity B to the prospective buyers.

14.  Regarding any quality issues with products, and any resulting claims, Entity B will bear all relevant responsibilities and expenses.

15.  Entity A receives sales commission from Entity B based on the sales amount on the sales contract generated between Entity B and the buyer. The commission is paid in accordance with the terms of the Commission Agreement. The agreed commission amount is the specified percentage of the total sales amount on the contract.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-25

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-25(5)

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 38-190

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(2A)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(3)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(4)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

In this reasoning, unless otherwise stated,

•         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act);

•         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act;

•         where the term 'Australia' is used, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act; and

•         all reference materials referred to are available on the Australian Taxation Office (ATO) website.

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies and section 9-40 provides that an entity must pay the GST payable on any taxable supply that it makes.

No GST is payable where a supply is not a taxable supply or where a supply is GST-free or input taxed.

Taxable supply

An entity makes a taxable supply if it meets the requirements of section 9-5, which states:

You make a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is connected with indirect tax zone; and

(d) you are registered or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

All of the above requirements of a taxable supply under section 9-5 must be met for the supply to be a taxable supply.

The supplies made by Entity A are of finding buyers for the overseas seller Entity B. The supplies satisfy the requirements of paragraphs 9-5(a), (b) and (d) as the supply is for consideration (the commission) and is made in the course or furtherance of an enterprise that Entity A carries on, and Entity A is registered for GST.

What remains to be considered is whether the supply by Entity A is connected with the indirect tax zone, as required under paragraph 9-5(c).

A supply that is not connected with the indirect tax zone is not a taxable supply under section 9-5.

Connected with the indirect tax zone

Section 9-25 of the GST Act establishes when a supply is 'connected with the indirect tax zone'. Relevantly, subsection 9-25(5) provides that a supply of anything other than goods or real property (such as a supply of services) is connected with the indirect tax zone if:

(a) the thing is done in the indirect tax zone; or

(b) the supplier makes the supply through an enterprise that the supplier carries on in the indirect tax zone; or

(c) all of the following apply:

(i) neither paragraph (a) nor (b) applies in respect of the thing;

(ii) the thing is a right or option to acquire another thing;

(iii) the supply of the other thing would be connected with the indirect tax zone; or

(d) the recipient of the supply is an Australian consumer.

On the facts, Entity A carries on an enterprise in the indirect tax zone and provides its services through its enterprise. Therefore, the supply made by Entity A will be connected with the indirect tax zone under paragraph 9-25(5)(b) and paragraph 9-5(c) will be satisfied.

Consequently, all the requirements of paragraphs 9-5(a) to 9-5(d) will be met and the supply will be a taxable supply unless it is GST-free or input taxed.

There is no provision under the GST Act that will make the supply of the services by Entity A input taxed.

Therefore, what remains to be considered is whether the supply of the services is GST-free.

A supply is GST-free if it is GST-free under Division 38 or under a provision of another Act. The supply of a right to receive a GST-free supply is also GST-free under paragraph 9-30(1)(b) of the GST Act.

GST-free supply

Section 38-190 of the GST Act sets out the circumstances in which certain supplies of things other than goods or real property, for consumption outside of Australia are GST-free. As Entity A makes a supply of services, section 38-190 of the GST Act is relevant for consideration.

The table in subsection 38-190(1) comprises five items which set out supplies of things other than goods or real property that are GST-free. If the requirements of one of those items are met the supply is GST-free, provided that subsections 38-190(2), (2A) or (3) do not negate that GST-free status.

A supply that is not GST-free under one of the items in subsection 38-190(1) may be GST-free under one of the other items.

Of relevance to Entity A's services are items 2 and 3 in the table in subsection 38-190(1). Item 2 applies to supplies made to non-resident entities. Item 3 applies to supplies made to entities irrespective of their residency status. As Item 3 applies to supplies made to all entities, including non-residents, supplies made to non-residents may be considered under item 2 or item 3.

Item 2

Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) provides that a supply of a thing, other than goods or real property, made to a non-resident is GST-free if the non-resident is not in the indirect tax zone when the thing supplied is done and:

(a) the supply is neither a supply of work physically performed on goods situated in the indirect tax zone when the work is done nor a supply directly connected with real property situated in the indirect tax zone, or

(b) the non-resident acquires the thing in carrying on the non-resident's enterprise but is not registered or required to be registered.

Only one of the paragraphs in item 2 needs to be satisfied.

Subsection 38-190(3) provides that without limiting subsection 38-190(2) or (2A), a supply covered by item 2 in that table is not GST-free if:

a) it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and

b) the supply is provided or the agreement requires it to be provided to another entity in Australia; and

c) for a supply other than an input taxed supply - none of the following applies:

(i) the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it;

(ii) the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it; or

(iii) the other entity is an individual who is provided with the supply as an employee or officer of the recipient, and the recipient's acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense.

A supply is made to a non-resident for the purposes of item 2 if the supply is made to an entity that is a person who is not a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). A non-resident is an 'entity that is not an Australian resident'.

The requirement that the non-resident in item 2 is not in the indirect tax zone when the thing supplied is done is a requirement, in our view, that the non-resident or recipient is not in the indirect tax zone in relation to the supply when the thing supplied is done.

We determine whether the not in the indirect tax zone requirement is satisfied by determining whether the non-resident entity is in Australia in relation to the supply. If the entity is in Australia in relation to the supply, the entity does not satisfy the not in the indirect tax zone requirement.

On the facts, Entity B is a non-resident and located overseas when Entity A provides its services to Entity B. The supply is neither a supply of work physically performed on goods situated in the indirect tax zone when the work is done, nor a supply directly connected with real property situated in the indirect tax zone.

Moreover, Entity B acquires the services in carrying on its enterprise but is not registered or required to be registered for GST. Therefore, supplies made by Entity A to non-resident Entity B will satisfy the requirements of item 2 in the table of subsection 38-190(1) and will be GST-free under item 2.

More information on item 2 and subsection 38-190(3) of the GST Act is available in Goods and Services Tax Rulings GSTR 2004/7 and 2005/6.

Item 3

Item 3 in the table of subsection 38-190(1) of the GST Act (Item 3) provides that a supply of things other than goods or real property is GST-free if:

(a) the supply is made to a recipient who is not in the indirect tax zone when the thing supplied is done; and

(b) the effective use or enjoyment of the supply takes place outside the indirect tax zone;

other than a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with real property situated in Australia.

The term 'recipient' in relation to a supply in defined in section 195-1 and means the entity to which the supply is made.

Paragraph (a) of Item 3 requires that the supply is made to a recipient who is 'not in the indirect tax zone' when the thing supplied is done.

Goods and Services Tax Ruling GSTR 2004/7 states (at paragraph 181) that this requirement is in effect a proxy test for determining where the supply to that recipient is consumed. The presumption is that if the recipient of the supply is 'not in the indirect tax zone' when the thing supplied is done, the supply of that thing is for consumption outside the indirect tax zone and is GST-free, provided the other requirements of Item 3 are met.

Further, we consider that the requirement that the recipient of a supply in Item 3 is 'not in the indirect tax zone' when the thing supplied is done, requires that the recipient is 'not in the indirect tax zone' when the thing supplied is done.

We determine whether the not in the indirect tax zone requirement is satisfied by determining whether the recipient is in Australia in relation to the supply. If the entity is in Australia in relation to the supply, the entity does not satisfy the not in Australia requirement.

Although the recipient must not be in the indirect tax zone, it is not a requirement of Item 3 that the recipient be a non-resident. Item 3 applies to supplies made to entities irrespective of their residency status.

The place of effective use or enjoyment of a supply

Guidelines on the circumstances in which 'effective use or enjoyment' of a supply takes place outside Australia are set out in Goods and Services Tax Ruling GSTR 2007/2.

From the facts given, Entity B is not in the indirect tax zone in relation to the supply when the supply of the services by Entity A is done, and the effective use and enjoyment of the supply of the services takes place outside the indirect tax zone.

Conclusion

The supply of the agency services to the overseas entity by Entity A, the effective use or enjoyment of which takes place outside the indirect tax zone, will be GST-free under Item 3 in the table in subsection 38-190(1).

The supply of services by Entity A to the non-resident Entity B which is located overseas and not in the indirect tax zone when the thing supplied is done, will also be covered under Item 2 in the table in subsection 38-190(1). The supply to the non-resident recipient Entity B will be GST-free under Item 2 or Item 3.